10-Q/A 1 0001.txt FORM 10-Q/A (PERIOD ENDED SEPTEMBER 30, 2000) As filed with the Securities and Exchange Commission on November 22, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number: 0-7722 IMPERIAL BANCORP (Exact name of registrant as specified in its charter) California 95-2575576 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 9920 South La Cienega Boulevard Inglewood, California 90301 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 417-5600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [_] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Shares outstanding at November 8, 2000 Common stock, no par 44,373,855 This report contains a total of 38 pages. PART I. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 This Form 10 Q/A reflects the correction of a clerical error contained in the previously filed Form 10-Q for the quarter ended September 30, 2000 by deleting a partial paragraph erroneously included under "Provision for loan losses." Except for the historical information contained herein, the following discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward- looking terminology including "may", "will", "intend", "should", "expect", "anticipate", "estimate" or "continue" or the negatives thereof or other comparable terminology. The Company's actual results could differ materially from those anticipated in such forward-looking statements as a result of various factors, including those set forth in documents filed with the Securities and Exchange Commission. The following discussion presents information about the results of operations, financial condition, liquidity, and capital resources of Imperial Bancorp (the "Company") as of and for the three and nine months ended September 30, 2000. This information should be read in conjunction with the Company's 1999 Consolidated Financial Statements and notes thereto, and the accompanying quarterly unaudited Consolidated Financial Statements and notes thereto. GENERAL Imperial Bancorp is a diversified financial services company specializing in the delivery of a wide variety of financial products and services tailored to meet the financing and cash management needs of middle market companies, emerging growth companies, entrepreneurs and professionals. Through its bank and nonbank subsidiaries, the Company is uniquely positioned to provide customized products and superior customer service to its customers across a broad spectrum of industries. The Company's largest subsidiary, Imperial Bank, operates 15 regional banking offices; 12 throughout California and out-of-state offices in Arizona, Colorado and Washington. Additionally, the Bank operates 16 loan production offices located throughout the United States. The Company's business activities are conducted through three principal operating segments: Commercial Banking, Emerging Growth and Syndicated Finance. Several smaller businesses and the Company's 56% investment in Official Payments Corporation ("OPAY") (Nasdaq: OPAY) are grouped into a fourth segment. OVERVIEW OF CONSOLIDATED RESULTS OF OPERATIONS Net income increased 56.3% to $23.2 million, or $0.51 per share, for the three months ended September 30, 2000, from $14.9 million, or $0.32 a share, for the year-earlier quarter. Growth in net interest income for the current quarter, driven by loan growth and increased income realized from warrants and equity investments more than offset increases in the loan loss provision and noninterest expense compared with the year-earlier quarter. Net income for third quarter 2000 includes a $2.0 million, or $0.05 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the quarter. Net income realized from warrants and equity investments increased 410% to $10.2 million after tax for the quarter ended September 30, 2000, from $2.0 million a year earlier. Net income for the year-earlier quarter includes a $1.8 million after-tax loss on the sale of Imperial Credit Industries, Inc. ("ICII") (Nasdaq: ICII) common stock. Earnings per share amounts are reported on a diluted basis and reflect an 8% stock dividend paid on February 18, 2000. The major components of net income and changes in these components are summarized in the following table for the quarters ended September 30, 2000 and 1999: Page 12 of 38
========================================================================================================================== Imperial Bancorp and Subsidiaries Three months ended September 30, ------------------------------------------------------------ Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent -------------------------------------------------------------------------------------------------------------------------- Interest income $ 132,294 $ 99,147 $ 33,147 33.4% Interest expense 42,767 30,723 12,044 39.2 -------------------------------------------------------------------------------------------------------------------------- Net interest income 89,527 68,424 21,103 30.8 Provision for loan losses 19,300 6,000 13,300 221.7 -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 70,227 62,424 7,803 12.5 -------------------------------------------------------------------------------------------------------------------------- Noninterest income: Loss on sale of ICII stock - (3,136) 3,136 (100.0) Income from the realization of warrants and equity investments (1) 15,760 3,420 12,340 360.8 Other noninterest income 23,887 16,487 7,400 44.9 -------------------------------------------------------------------------------------------------------------------------- Total noninterest income 39,647 16,771 22,876 136.4 -------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and benefits 45,333 30,250 15,083 49.9 Other noninterest expense 31,438 24,455 6,983 28.6 -------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 76,771 54,705 22,066 40.3 -------------------------------------------------------------------------------------------------------------------------- Minority interest in loss of consolidated subsidiary 2,464 148 2,316 - Income before income taxes 35,567 24,638 10,929 44.4 Income tax provision 12,350 9,786 2,564 26.2 -------------------------------------------------------------------------------------------------------------------------- Net income $ 23,217 $ 14,852 $ 8,365 56.3% ========================================================================================================================== Net income excluding OPAY $ 25,256 $ 15,196 $ 10,060 66.2% Earnings per share: Basic earnings per share $ 0.53 $ 0.33 $ 0.20 60.6% Diluted earnings per share 0.51 0.32 0.19 59.4 Diluted earnings per share excluding OPAY $ 0.56 $ 0.33 $ 0.23 69.7% -------------------------------------------------------------------------------------------------------------------------- (1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories: 2000 1999 ----------------------------- Gains on securities available for sale $ 2,384 $ 1,548 Gains on the exercise of warrants and sale of equity securities 12,616 2,173 Other noninterest income 760 (301) ----------------------------- Total $ 15,760 $ 3,420 ============================= ==========================================================================================================================
The annualized return on average assets and average equity increased to 1.41% and 18.07%, respectively, for third quarter 2000, from 1.03% and 14.22%, respectively, for the year-earlier quarter. Excluding OPAY, the annualized return on average assets increased to 1.55% for third quarter 2000 from 1.06% for the year-earlier quarter. Excluding OPAY, the annualized return on average equity increased to 21.37% for third quarter 2000 from 14.58% for the year- earlier quarter. Net income for the nine months ended September 30, 2000, increased 29% to $63.0 million, or $1.36 a share, from $48.9 million, or $1.05 a share, for the year- earlier period. Net income for the first nine months of 2000 includes a $8.0 million, or $0.18 a share, after-tax operating loss representing the Company's share of OPAY's operating losses for the period net of a gain related to the exercise of OPAY stock options. Net income for the nine months ended September 30, 2000 includes a $1.7 million after-tax gain on the sale of the trust business compared with a $5.1 million after-tax gain for the year-earlier period. In addition to the gains on the sale of businesses discussed above, after-tax income realized Page 13 of 38 on warrants and equity investments increased to $27.3 million for the nine months ended September 30, 2000, from $6.7 million for the year-earlier period. The major components of net income and changes in these components are summarized in the following table for the nine months ended September 30, 2000 and 1999:
=========================================================================================================================== Imperial Bancorp and Subsidiaries Nine months ended September 30, ------------------------------------------------------- Change (Dollars in thousands, except per share data) 2000 1999 Amount Percent --------------------------------------------------------------------------------------------------------------------------- Interest income $ 372,609 $ 278,796 $ 93,813 33.6% Interest expense 118,707 82,052 36,655 44.7 --------------------------------------------------------------------------------------------------------------------------- Net interest income 253,902 196,744 57,158 29.1 Provision for loan losses 53,794 20,820 32,974 158.4 --------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 200,108 175,924 24,184 13.7 --------------------------------------------------------------------------------------------------------------------------- Noninterest income: Gain on sale of ICII stock - 2,255 (2,255) (100.0) Gain on sale of the trust business 2,631 8,817 (6,186) (70.2) Income from the realization of warrants and equity investments (1) 42,264 11,648 30,616 262.8 Other noninterest income 69,077 52,641 16,436 31.2 --------------------------------------------------------------------------------------------------------------------------- Total noninterest income 113,972 75,361 38,611 51.2 --------------------------------------------------------------------------------------------------------------------------- Noninterest expense: Salaries and benefits 133,310 90,492 42,818 47.3 Other noninterest expense 93,381 79,072 14,309 18.1 --------------------------------------------------------------------------------------------------------------------------- Total noninterest expense 226,691 169,564 57,127 33.7 --------------------------------------------------------------------------------------------------------------------------- Minority interest in loss of consolidated subsidiary 10,348 127 10,221 - Income before income taxes 97,737 81,848 15,889 19.4 Income tax provision 34,706 32,962 1,744 5.3 --------------------------------------------------------------------------------------------------------------------------- Net income $ 63,031 $ 48,886 $ 14,145 28.9% =========================================================================================================================== Net income excluding OPAY $ 71,045 $ 49,184 $ 21,861 44.4% Earnings per share: Basic earnings per share $ 1.41 $ 1.09 $ 0.32 29.4% Diluted earnings per share 1.36 1.05 0.31 29.5 Diluted earnings per share excluding OPAY $ 1.54 $ 1.06 $ 0.48 45.3% --------------------------------------------------------------------------------------------------------------------------- (1) Income realized on warrants and equity investments is reported in the Consolidated Statements of Income in the following categories: 2000 1999 -------------------------- Gains on securities available for sale $ 14,351 $ 1,548 Gains on the exercise of warrants and sale of equity securities 22,831 9,555 Other noninterest income 5,082 545 -------------------------- Total $ 42,264 $ 11,648 ========================== ===========================================================================================================================
The annualized return on average assets and average equity were 1.31% and 16.87%, respectively, for the nine months ended September 30, 2000, compared with 1.18% and 16.32%, respectively, for the year-earlier period. Excluding Page 14 of 38 OPAY, the annualized return on average assets increased to 1.49% for the first nine months of 2000 from 1.18% for the year-earlier period. Excluding OPAY, the annualized return on average equity increased to 20.83% for the first nine months of 2000 from 16.46% for the year-earlier period. Selected ratios for the three and nine months ended September 30, 2000 and 1999, are provided in the following table:
================================================================================================================== At or for the At or for the three months ended nine months ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------ Selected ratios Reported: Return on average assets (annualized) 1.41% 1.03% 1.31% 1.18% Return on average equity (annualized) 18.07 14.22 16.87 16.32 Return on average earning assets (annualized) 1.54 1.14 1.42 1.30 Net interest margin 5.93 5.23 5.74 5.23 Efficiency ratio 57.52 64.04 58.81 62.27 Average equity-to-average assets 7.78 7.27 7.74 7.20 Total risk-based capital 13.33 12.76 13.33 12.76 Tier 1 risk-based capital 10.35 9.54 10.35 9.54 Tier 1 leverage 9.04 8.50 9.04 8.50 Excluding OPAY: Return on average assets (annualized) 1.55 1.06 1.49 1.18 Return on average equity (annualized) 21.37 14.58 20.83 16.46 Net interest margin 5.90 5.24 5.74 5.23 Efficiency ratio 54.29 63.17 54.39 61.86 Asset quality ratios Nonaccrual loans to total loans 1.45 1.18 1.45 1.18 Nonaccrual and restructured loans to total loans 1.60 1.31 1.60 1.31 Allowance for credit losses to total loans 2.18 1.88 2.18 1.88 Net charge-offs as a percentage of total average loans (annualized) 0.87 0.34 1.12 0.37 ==================================================================================================================
Net Interest Income The Company's operating results depend primarily on net interest income. Net interest income is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest margin is net interest income expressed as a percentage of average earning assets. Due to the asset-sensitive nature of the Company's balance sheet, a variable rate loan portfolio funded in large part by demand deposits and fixed rate liabilities, the recent increases in the prime rate have favorably impacted net interest income and net interest margin. Net interest income increased to $89.5 million for the three months ended September 30, 2000, from $68.4 million for the year-earlier quarter. Net interest income for the current quarter includes $1.5 million related to OPAY. The increase in net interest income is due to growth in average earning assets, which increased 16% to $6.0 billion for the quarter ended September 30, 2000, from $5.2 billion for the year-earlier quarter. Average loans increased $411.1 million, or 10.2%, to $4.4 billion for the current quarter from $4.0 billion for third quarter 1999. Loans comprised approximately 74% of average earnings assets for the current quarter compared with approximately 78% for the year-earlier quarter. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. Average deposits grew 15% to $5.7 billion for third quarter 2000, from $4.9 billion for the year- earlier quarter. Deposit growth continues to exceed loan funding requirements. The resulting excess liquidity was invested in securities, leading to a decline in average loans as a percentage of average earning assets compared with the prior year. Page 15 of 38 The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the quarters ended September 30, 2000 and 1999:
================================================================================================================================== Three months ended Sept 30, 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) ---------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $ 4,436,456 $ 103,311 (3) 9.26% $ 4,025,351 $ 83,134 (3) 8.19% Trading instruments 112,844 1,910 6.73 55,484 748 5.35 Interest-bearing deposits 4,054 63 6.18 - - - Securities available for sale (4) 1,057,409 19,882 7.51 735,380 9,719 5.21 Securities held to maturity 3,637 69 7.55 3,807 70 7.29 Federal funds sold and securities purchased under resale agreement 343,435 5,690 6.59 302,103 3,944 5.18 Loans held for sale 56,717 1,369 9.60 60,274 1,532 10.08 ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 6,014,552 132,294 8.76% 5,182,399 99,147 7.59% ---------------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (80,939) (70,099) Cash 363,712 377,042 Other assets 271,368 215,132 ------------ ------------ Total assets $ 6,568,693 $ 5,704,474 ============ ============ Interest-bearing liabilities: Savings $ 26,683 $ 114 1.70% $ 23,719 $ 106 1.77% Money market 1,203,344 10,519 3.48 1,191,852 8,600 2.86 Time-under $100,000 115,077 1,843 6.37 161,461 2,098 5.16 Time-$100,000 and over 1,598,821 25,673 6.39 1,228,538 15,304 4.94 ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,943,925 38,149 5.16 2,605,570 26,108 3.98 ---------------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 35,034 623 7.07 74,688 955 5.07 Long-term borrowings 106,285 2,391 8.95 105,568 2,100 7.89 Capital securities 63,670 1,604 10.02 73,406 1,560 8.43 ---------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,148,914 42,767 5.40% 2,859,232 30,723 4.26% ---------------------------------------------------------------------------------------------------------------------------------- Demand deposits 2,726,990 2,311,767 Other liabilities 181,705 119,030 Shareholders' equity 511,084 414,445 Total liabilities and ------------ ------------ shareholders' equity $ 6,568,693 $ 5,704,474 ============ ============ Net interest income/Net interest margin $ 89,527 5.93% $ 68,424 5.23% ========== ========== ========== ========== ==================================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $6.6 million and $6.2 million for the three months ended September 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost. Page 16 of 38 Net interest income increased to $253.9 million for the nine months ended September 30, 2000, from $196.7 million for the year-earlier period. Net interest income for the first nine months includes $3.2 million related to OPAY. The increase in net interest income was driven by the growth in average earning assets, which increased 18% to $5.9 billion for the first nine months of 2000 from $5.0 billion for the year-earlier period. Average loans grew $307.9 million, or approximately 8%, to $4.2 billion from $3.9 billion for the year- earlier period. Loans comprised approximately 71% of average earning assets for the first nine months of 2000 compared with 78% for the year-earlier period. The remaining increase in average earning assets from the prior year is due to increases in trading instruments and investments. The following table provides information on average interest-earning assets and interest-bearing liabilities and the yields thereon for the nine months ended September 30, 2000 and 1999: Page 17 of 38
============================================================================================================================= Nine months ended Sept 30, 2000 1999 ----------------------------------------------------------------------------------------------------------------------------- Interest Interest Average Income/ Average Average Income/ Average (Dollars in thousands) Balance Expense Rate (1) Balance Expense Rate (1) ----------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans-net of unearned income and deferred loan fees (2) $ 4,222,856 $ 290,074 (3) 9.18% $ 3,914,946 $ 235,287 (3) 8.04% Trading instruments 113,045 5,380 6.36 63,624 2,617 5.50 Interest-bearing deposits 5,560 250 6.01 - - - Securities available for sale (4) 996,657 49,378 6.66 673,382 25,740 5.08 Securities held to maturity 3,678 202 7.34 3,841 214 7.45 Federal funds sold and securities purchased under resale agreements 515,855 23,480 6.08 334,605 12,369 4.94 Loans held for sale 61,217 3,845 8.39 33,716 2,569 10.19 ----------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 5,918,868 372,609 8.42% 5,024,114 278,796 7.42% ----------------------------------------------------------------------------------------------------------------------------- Allowance for loan losses (77,974) (67,185) Cash 355,689 368,586 Other assets 253,345 234,174 ----------- ----------- Total assets $ 6,449,928 $ 5,559,689 =========== =========== Interest-bearing liabilities: Savings $ 24,438 $ 319 1.74% $ 29,153 $ 399 1.83% Money market 1,272,750 30,270 3.18 1,119,576 23,771 2.84 Time-under $100,000 96,307 5,378 7.46 160,192 6,175 5.15 Time-$100,000 and over 1,539,576 67,148 5.83 1,103,305 39,930 4.84 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 2,933,071 103,115 4.70 2,412,226 70,275 3.90 ----------------------------------------------------------------------------------------------------------------------------- Short-term borrowings 72,614 3,351 6.16 85,211 3,114 4.89 Long-term borrowings 104,392 7,319 9.37 70,280 4,099 7.80 Capital securities 68,375 4,922 9.62 73,393 4,564 8.31 ----------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 3,178,452 118,707 4.99% 2,641,110 82,052 4.15% ----------------------------------------------------------------------------------------------------------------------------- Demand deposits 2,606,325 2,411,452 Other liabilities 166,212 106,704 Shareholders' equity 498,939 400,423 Total liabilities and ----------- ----------- shareholders' equity $ 6,449,928 $ 5,559,689 =========== =========== Net interest income/Net interest margin $ 253,902 5.74% $ 196,744 5.23% ========= ======== ========= ========= =============================================================================================================================
(1) The yields are not presented on a tax equivalent basis as the effects of doing so would not be material. (2) Average loan balance includes nonaccrual loans. (3) Includes net loan fee income and amortization of $20.1 million and $16.5 million for the nine months ended September 30, 2000 and 1999, respectively. (4) Average balance includes unrealized gains and losses and yield is calculated based upon amortized cost. Net interest margin increased to 5.93% and 5.74% for the three and nine months ended September 30, 2000, respectively, from 5.23% for the year-earlier periods. The increase in loan yields, due to increases in the prime rate, more than offset higher rates paid on deposits. Approximately 75% of the Company's variable rate loans are tied to the Page 18 of 38 prime rate. Certain loans, including entertainment loans and syndicated loans, are tied to the London Interbank Offered Rate ("LIBOR"). The average prime rate increased 128 basis points for the first nine months of 2000 to 9.15% from 7.87% for the year-earlier period. Management expects some contraction in the net interest margin for the fourth quarter 2000 due to increases in deposit rates. Interest income for the three months ended September 30, 2000 and 1999, was reduced by approximately $771,900 and $81,000, respectively, due to interest reversals on nonaccrual loans. Interest income for the nine months ended September 30, 2000 and 1999, was reduced by approximately $2.1 million and $503,800, respectively, due to interest reversals on nonaccrual loans. The average cost of interest-bearing deposits increased for the quarter and year-to-date compared with the year-earlier periods. The growth in average time certificate of deposit ("TCD") balances, for the three and nine months ended September 30, 2000, compared with the year earlier periods, occurred primarily in the Emerging Growth Division, and in brokered TCD balances raised in conjunction with the Company's overall funding plan. Demand deposits continue to be a significant funding source for the Company. Average demand deposits comprised 48% and 47% of total average deposits for the three and nine months ended September 30, 2000, compared with 47% and 50% of total average deposits for the year-earlier periods. The growth, in average demand deposits was generated by the Commercial Banking and Emerging Growth Divisions. The increase in average long-term borrowings for the nine months ended September 30, 2000, compared with the year-earlier period is due to the issuance of $100 million of 8.5% Subordinated Capital Notes by Imperial Bank in April 1999. Analysis of Changes in Net Interest Income Changes in the Company's net interest income are a function of both changes in rates and changes in volumes of interest-earning assets and interest-bearing liabilities. The following tables set forth information regarding changes in interest income and interest expense for the three and nine months ended September 30, 2000 and 1999. The total change is segmented into the change attributable to variations in volume (changes in volume multiplied by old rate) and the change attributable to variations in interest rates (changes in rates multiplied by old volume). The change in interest due to both rate and volume (changes in rate multiplied by changes in volume) is classified as rate/volume. Nonaccrual loans are included in average loans for these computations. The tables are not presented on a tax equivalent basis as the effects are not material. Page 19 of 38
================================================================================================================== Three months ended Sept 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total ------------------------------------------------------------------------------------------------------------------ Loans, net $ 8,467 $ 10,831 $ 879 $ 20,177 Trading instruments 771 193 198 1,162 Interest-bearing deposits 63 - - 63 Securities available for sale 4,214 4,256 1,693 10,163 Securities held to maturity (3) 2 - (1) Federal funds sold and securities purchased under resale agreements 538 1,072 136 1,746 Loans held for sale (90) (73) - (163) ------------------------------------------------------------------------------------------------------------------ Total interest income 13,960 16,281 2,906 33,147 ------------------------------------------------------------------------------------------------------------------ Savings 13 (4) (1) 8 Money market 83 1,842 (6) 1,919 Time-under $100,000 (601) 494 (148) (255) Time-$100,000 and over 4,600 4,465 1,304 10,369 ------------------------------------------------------------------------------------------------------------------ Total deposits 4,095 6,797 1,149 12,041 ------------------------------------------------------------------------------------------------------------------ Short-term borrowings (506) 376 (202) (332) Long-term borrowings 14 281 (4) 291 Capital securities (206) 294 (44) 44 ------------------------------------------------------------------------------------------------------------------ Total interest expense 3,397 7,748 899 12,044 ------------------------------------------------------------------------------------------------------------------ Change in net interest income $ 10,563 $ 8,533 $ 2,007 $ 21,103 ==================================================================================================================
Page 20 of 38
======================================================================================================================= Nine months ended Sept 30, 2000 over 1999 (Dollars in thousands) Volume Rate Rate/Volume Total ----------------------------------------------------------------------------------------------------------------------- Loans, net $ 18,522 $ 33,420 $ 2,845 $ 54,787 Trading instruments 2,035 409 319 2,763 Interest-bearing deposits 250 - - 250 Securities available for sale 12,292 7,969 3,377 23,638 Securities held to maturity (9) (3) - (12) Federal funds sold and securities purchased under resale agreements 6,706 2,850 1,555 11,111 Loans held for sale 2,097 (454) (367) 1,276 ----------------------------------------------------------------------------------------------------------------------- Total interest income 41,893 44,191 7,729 93,813 ----------------------------------------------------------------------------------------------------------------------- Savings (62) (16) (2) (80) Money market 3,255 2,834 410 6,499 Time-under $100,000 (2,465) 2,765 (1,097) (797) Time-$100,000 and over 15,804 8,153 3,261 27,218 ----------------------------------------------------------------------------------------------------------------------- Total deposits 16,532 13,736 2,572 32,840 ----------------------------------------------------------------------------------------------------------------------- Short-term borrowings (461) 815 (117) 237 Long-term borrowings 1,991 825 404 3,220 Capital securities (312) 715 (45) 358 ----------------------------------------------------------------------------------------------------------------------- Total interest expense 17,750 16,091 2,814 36,655 ----------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 24,143 $ 28,100 $ 4,915 $ 57,158 =======================================================================================================================
In conformity with banking industry practice, payments for accounting, courier and other deposit-related services provided to the Company's real estate services customers are recorded as noninterest expense. If these deposits were treated as interest-bearing and the payments reclassified as interest expense, the Company's reported net interest income and noninterest expense would have been reduced by $4.8 million and $13.6 million for the three and nine months ended September 30, 2000, respectively, and by $4.5 million and $17.1 million for the year earlier periods, respectively. The net interest margin would have decreased to 5.61% and 5.43% for the three and nine months ended September 30, 2000, respectively, and to 4.89% and 4.78% for the year-earlier periods. Provision for Loan Losses The provision for loan losses increased for third quarter 2000 to $19.3 million from $6.0 million for the year-earlier quarter. Net charge-offs for the quarter increased to $9.7 million, or 0.88% of average loans on an annualized basis, for third quarter 2000, from $3.4 million, or 0.34% of average loans on an annualized basis, for the year-earlier quarter. The provision for loan losses increased to $53.8 million for the nine months ended September 30, 2000, from $20.8 million for the year-earlier period. Year to date net charge-offs increased to $35.4 million, or 1.12% of average loans, from $10.7 million, or 0.37% of total average loans, for the year-earlier period. The increased provision for the current year is largely attributable to higher charge-offs recorded on a limited number of nationally syndicated loans. For the current quarter charge-offs decreased by 52%, to $9.7 million from $20.6 million in the previous quarter. Provision expense also declined to $19.3 million from $22.6 million in the previous quarter. Page 21 of 38 Noninterest Income: Noninterest income increased to $39.6 million for third quarter 2000, from $16.8 million for the year-earlier quarter. Income realized from warrants and investments in equity funds increased to $15.8 million for the quarter ended September 30, 2000, from $3.4 million for the year-earlier quarter. Noninterest income for third quarter 1999 includes a $3.1 million loss on the sale of ICII stock. Excluding warrant income and the ICII loss in the prior year quarter, noninterest income increased 45% for the third quarter of 2000, from the year earlier quarter, primarily due to increases in international fees, merchant card processing fees and commissions from sales of mutual funds (see the Other Segment discussions). Noninterest income increased 51% to $114.0 million for the first nine months of 2000, from $75.4 million for the year-earlier period. Noninterest income for the first nine months of 2000 includes a $2.6 million gain associated with last year's sale of the trust business. This gain represents a payment related to customer retention as provided for in the trust sale agreement. Noninterest income for the year-earlier period includes an $8.8 million gain on the sale of the trust business and a $2.5 million gain on the sale of a software license by a nonbank subsidiary. Income realized from warrants and equity investments increased to $42.3 million for the nine months ended September 30, 2000, from $11.6 million for the year-earlier period. Noninterest Expense: Noninterest expense before minority interest increased 40% for the quarter ended September 30, 2000, to $76.8 million from $54.7 million for the year-earlier quarter. Excluding OPAY, noninterest expense for the quarter increased 29% to $68.9 million from $53.6 million a year ago. For the first nine months of 2000, noninterest expense increased 28% to $216.3 million from $169.4 million for the year-earlier period. Excluding OPAY, year-to-date noninterest expense increased 17% to $195.5 million from $167.3 million for the year-earlier period. The increase in noninterest expense excluding OPAY is primarily due to higher salaries and benefits and occupancy expense associated with the overall growth in the Company's present activities as well as the addition of new business initiatives. The average number of full-time equivalent staff increased to 1,326 for the nine months ended September 30, 2000, from 1,254 for the year-earlier period. The increase in salaries also reflects increases in incentives tied to Company performance. Customer services expense declined for the quarter and year-to-date compared with the year earlier periods due to a decrease in average title and escrow deposit balances. Although noninterest expense has increased overall, the Company's efficiency ratio excluding OPAY was lower for both the quarter and year-to-date compared with a year ago due to proportionally higher growth in revenues. The efficiency ratio, excluding OPAY, decreased to 54.39% for the first nine months of 2000 from 61.86% for the year-earlier period. Income Taxes: The Company recorded income taxes of $12.4 million and $34.7 million for the three and nine months ended September 30, 2000, respectively. Income taxes were $9.8 million and $33.0 million for the three and nine months ended September 30, 1999. On April 24, 2000, the Company formed Imperial Special Investments, Inc. ("ISII"). ISII is a closed-end, non-diversified regulated investment company registered under the Investment Company Act of 1940. ISII's holdings consist of cash, investments and loans. The formation of ISII provides the Company with the capability to raise capital in a tax efficient manner for future business opportunities if desired. The formation and funding of ISII resulted in an estimated effective income tax rate of 35.5% for the first nine months of 2000 compared with 40.3% for the year-earlier period. In August 2000, the Commission completed an examination of ISII. The Company received the Commission's findings in a letter dated September 11, 2000. The Commission staff determined that ISII should not be eligible to be registered as an investment company due to the failure to meet certain statutory requirements of the Investment Company Act and requested that ISII voluntarily de-register. In its response to the Commission dated October 11, 2000, the Company stated that it disagrees with certain factual statements and conclusions of law contained Page 22 of 38 in the Commission's findings and sets forth the basis for its belief based on advice of counsel, which was included, that ISII was formed in compliance with regulatory requirements. The Company has declined the Commission's request to voluntarily de-register the fund and expects to receive further correspondence from the Commission. OPERATING SEGMENT RESULTS For reporting purposes, the Company aggregates its operating activities into four principal operating segments: Commercial Banking, Emerging Growth, Syndicated Finance and Other. See - "NOTE (7) Operating Segment Results." The following tables summarize the financial performance of these segments for the three and nine months ended September 30, 2000 and 1999: The Commercial Banking Segment
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 53,560 $ 48,382 $ 5,178 $ 150,012 $ 132,149 $ 17,863 Provision for loan losses (1) (807) 1,942 (2,749) 22,143 14,475 7,668 Noninterest income 7,954 7,485 469 22,993 16,488 6,505 Noninterest expense 28,646 27,149 1,497 88,739 76,624 12,115 -------------------------------------------------------------------------------------------------------------------------- Income before taxes 33,675 26,776 6,899 62,123 57,538 4,585 Income taxes 11,938 10,635 1,303 22,022 23,172 (1,150) -------------------------------------------------------------------------------------------------------------------------- Net income $ 21,737 $ 16,141 $ 5,596 $ 40,101 $ 34,366 $ 5,735 -------------------------------------------------------------------------------------------------------------------------- Average net loans (2) $ 2,835,291 $ 2,553,436 $ 281,855 $ 2,737,697 $ 2,414,100 $ 323,597 Average nonaccrual (3) 30,077 39,296 (9,219) 30,291 37,431 (7,140) Average assets 2,914,084 2,624,592 289,492 2,811,846 2,477,051 334,795 Average deposits 1,621,445 1,572,966 48,479 1,591,327 1,499,722 91,605 -------------------------------------------------------------------------------------------------------------------------- (1) Provision expense for the nine months ended September 30, 2000, includes $8.8 million related to a syndicated credit administered in a regional banking office. (2) Excluding nonaccrual loans. (3) Average nonaccrual loan balance includes $8.8 million related to a syndicated credit administered in a regional banking office until it was charged off in May 2000. ==========================================================================================================================
The Commercial Banking Segment consisting of the Company's middle market, residential construction, entertainment and small business lending ("SBA") operations accounted for the majority of the growth in average loans for the current quarter and year-to-date compared with the prior year. Most of the growth occurred in residential construction loans, which increased by $151 million, or 38%, for third quarter 2000 compared with the year-earlier quarter. Tract construction lending continues to grow despite higher mortgage rates due to continuing strength in the California real estate market coupled with the Company's focus on a select group of private homebuilders. The remaining loan growth occurred primarily in middle market lending. Approximately 80% of the commercial banking portfolio is prime based, resulting in higher interest income as prime rate increases. Loan growth has also led to higher loan fee income. Average deposits balances for the Commercial Banking Segment increased 3% and 6% for the three and nine months ended September 30, 2000, respectively, compared with the year-earlier periods. The decrease in loan loss provision for the current quarter compared with a year ago is the result of a $6.0 million loan loss recovery. The provision for the first nine months of 2000 includes $8.8 million associated with a nationally syndicated loan that was administered in a regional office due to a deposit relationship. This loan was charged off in the second quarter. The reduction in nonaccrual loan balances compared with the year-earlier period is due in part to the sale of film production loans from the Lewis Horwitz Organization to ICII in the fourth quarter of 1999. Page 23 of 38 Although service charge income was relatively flat compared with the prior year, noninterest income increased due to growth in other fees such as international fees, leasing fees and referral fees related to SBA lending. The Company continues to develop and introduce new cash management products, including internet-based products, that are expected to result in increased fee income. The Emerging Growth Segment (including Imperial Ventures, Inc. and Imperial Creditcorp)
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 13,130 $ 8,660 $ 4,470 $ 39,819 $ 24,250 $ 15,569 Provision for loan losses 3,313 591 2,722 8,748 2,802 5,946 Noninterest income 18,505 3,716 14,789 47,638 12,266 35,372 Noninterest expense 14,216 7,207 7,009 34,551 21,782 12,769 -------------------------------------------------------------------------------------------------------------------------- Income before taxes 14,106 4,578 9,528 44,158 11,932 32,226 Income taxes 5,001 1,818 3,183 15,654 4,802 10,852 -------------------------------------------------------------------------------------------------------------------------- Net income $ 9,105 $ 2,760 $ 6,345 $ 28,504 $ 7,130 $ 21,374 -------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 450,318 $ 300,538 $ 149,780 $ 411,642 $ 324,466 $ 87,176 Average nonaccrual loans 9,734 5,761 3,973 6,819 5,544 1,275 Average assets 488,181 314,940 173,241 441,973 338,641 103,332 Average deposits 1,030,133 689,815 340,318 1,073,949 554,706 519,243 -------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ==========================================================================================================================
The Emerging Growth Segment ("EGD"), serving companies backed by venture capitalists, contributed 39% of consolidated net income for the three months ended September 30, 2000, up from 19% of consolidated net income for the year-earlier quarter. For the first nine months of 2000, EGD contributed 45% of consolidated net income compared with 15% for the year-earlier period. The growth in EGD's net income is largely due to increased noninterest income realized from warrants and equity investments in emerging growth companies and venture capital funds. Income derived from these activities increased to $15.8 million for third quarter 2000 from $3.4 million for the year-earlier quarter. On a year-to-date basis, income from warrants and equity investments increased to $42.3 million from $11.6 million for the year-earlier period. The Company obtains rights to acquire stock (in the form of warrants) from certain customers as part of negotiated credit facilities. The receipt of warrants does not change the loan covenants or collateral control techniques employed by the Company to mitigate the risk of a loan becoming uncollectible. Likewise, collateral requirements on loans with warrants are similar to lending arrangements where warrants are not obtained. As of October 23, 2000, the last time the Company reported on unrealized warrant gains, the Company had potential unrealized gains associated with warrants and equity positions of $8.7 million. The Company does not expect fourth quarter income from warrant activities to remain at levels reported for the first nine months of 2000. The amount of income realized by the Company from these equity rights in future periods may vary materially from that unrealized amount due to fluctuations in the market prices of the underlying common stock of these companies. The Company is restricted from liquidating a portion of these positions, although most of these restrictions will have expired by the end of the year. The Company views this income as a core contributor to its noninterest income. The increase in noninterest expense is primarily due to higher personnel and occupancy costs associated with opening new offices and adding staff to fuel future in the division. EGD experienced significant deposit growth in 2000 compared with the prior year. EGD's average deposit balances grew $340 million to $1.0 billion for third quarter 2000 from $690 million for the year-earlier quarter. On a year-to- Page 24 of 38 date basis, average deposits grew $519 million to $1.1 billion for the nine months ended September 30, 2000, from $555 million for the year-earlier period. The growth in deposits was distributed between noninterest-bearing and interest- bearing accounts with demand deposits averaging $287 million in the current quarter. Management has observed that venture capitalists are continuing to fund emerging growth companies across a broad spectrum of industries despite recent volatility in the Nasdaq. The Syndicated Finance Segment
========================================================================================================================== For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 6,458 $ 6,142 $ 316 $ 19,818 $ 18,070 $ 1,748 Provision for loan losses 16,740 3,467 13,273 21,947 3,543 18,404 Noninterest income 355 511 (156) 1,475 1,600 (125) Noninterest expense 1,480 1,677 (197) 4,928 5,440 (512) -------------------------------------------------------------------------------------------------------------------------- Income before taxes (11,407) 1,509 (12,916) (5,582) 10,687 (16,269) Income taxes (4,044) 599 (4,643) (1,979) 4,304 (6,283) -------------------------------------------------------------------------------------------------------------------------- Net income $ (7,363) $ 910 $ (8,273) $ (3,603) $ 6,383 $ (9,986) -------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 486,225 $ 594,321 $(108,096) $ 522,743 $ 600,359 $ (77,616) Average nonaccrual loans 21,649 317 21,332 12,314 100 12,214 Average assets 512,169 598,928 (86,759) 539,850 604,761 (64,911) Average deposits 17,089 3,771 13,318 16,340 6,931 9,409 -------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. ==========================================================================================================================
The Syndicated Finance Segment includes the Syndicated Finance and Merchant Banking Divisions. Both divisions originate loans principally on an indirect basis through other financial institutions. The Company's recent adverse credit experience with a limited number of syndicated credits is consistent with banking industry experience. The nonaccrual loans total $31.2 million or 52% of the total nonaccrual loans as of September 30, 2000. Syndicated credits also accounted for the majority of the increase in gross charge-offs for the quarter, $10.6 million of consolidated gross charge-offs of $16.8 million. Year-to-date charge-offs for the Syndicated Finance Segment do not include $8.8 million related to a nationally syndicated credit administered in a regional banking office which is reflected in the Commercial Banking Segment. For the year, net charge-offs of syndicated credits comprised $23.9 million of total net charge- offs of $35.4 million. The increase in charge-offs led to the higher loan loss provisions for the quarter and year-to-date. Management believes that these loans have adequate loan loss allowances. The Company's primary focus has been to establish strong commercial banking relationships with borrowers that enhance its deposit base and generate fee income in addition to yielding interest income through credit products. When deposit growth from title and escrow customers began to outpace relationship- based loan growth in the mid 1990s, the Company began investing a portion of this liquidity in nationally syndicated credits to maximize net interest income. Recognizing that purchased loans provide no supplemental noninterest income and that these credits cannot be monitored as closely as companies with which the Company has a direct relationship, management is currently emphasizing relationship-based loans and, accordingly, does not plan on increasing its nonrelationship-based syndicated loan portfolio. Page 25 of 38 The following table provides a distribution of the Company's participations in nationally syndicated loans by industry: =========================================================== Distribution of Syndicated Finance Loan Portfolio September 30, 2000 ----------------------------------------------------------- Industry Percent ----------------------------------------------------------- Manufacturing 34% Service 26 Gaming 24 Retail and restaurants 9 Heath care and related 7 ----------------------------------------------------------- Total 100% ----------------------------------------------------------- The Other Segment
========================================================================================================================= For the three months For the nine months ended September 30, ended September 30, (Dollars in thousands) 2000 1999 Change 2000 1999 Change ------------------------------------------------------------------------------------------------------------------------- Net interest income $ 16,379 $ 5,240 $ 11,139 $ 44,253 $ 22,275 $ 21,978 Provision for loan losses 54 - 54 956 - 956 Noninterest income 12,833 5,059 7,774 41,866 45,007 (3,141) Noninterest expense 29,965 18,524 11,441 88,125 65,591 22,534 ------------------------------------------------------------------------------------------------------------------------- Income before taxes (807) (8,225) 7,418 (2,962) 1,691 (4,653) Income taxes (545) (3,266) 2,721 (991) 684 (1,675) ------------------------------------------------------------------------------------------------------------------------- Net income $ (262) $ (4,959) $ 4,697 $ (1,971) $ 1,007 $ (2,978) ------------------------------------------------------------------------------------------------------------------------- Average net loans (1) $ 578,790 $ 521,659 $ 57,131 $ 483,747 $ 499,291 $ (15,544) Average nonaccrual loans 150 198 (48) 846 186 660 Average assets 2,654,259 2,166,014 488,245 2,656,259 2,139,236 517,023 Average deposits 3,002,248 2,650,785 351,463 2,857,780 2,762,319 95,461 ------------------------------------------------------------------------------------------------------------------------- (1) Excluding nonaccrual loans. =========================================================================================================================
The Other Segment includes activities not individually material such as the Company's 56% ownership in OPAY, the Merchant Card Division and nonbank subsidiaries of the holding company. The balance sheet of the Other Segment reflects the loan and deposit balances of the Financial Services Division, and the investment balances of the Treasury Management Division. The income and costs associated with these balances are fully allocated to the other operating segments for measuring segment profitability. The decrease in noninterest income compared with the year-earlier periods is due to gains totaling $11.1 million on the sales of the trust business and ICII common stock reported for the nine months ended September 30, 1999. Merchant card fees and commissions on the sale of nonproprietary mutual funds by the Company's broker/dealer grew to $12.9 million and $9.5 million for the nine months ended September 30, 2000, respectively, from $7.8 million and $4.6 million for the year-earlier period, respectively. The average balance of customer funds directed to nonproprietary mutual funds increased to $2.7 billion for September 2000 from $2.3 billion a year ago. The Company's after-tax net income includes losses of $2.0 million and $8.0 million for the three and nine months ended September 30, 2000, respectively, related to its investment in OPAY. OPAY's operating results are reported on a consolidated basis. See - "NOTE (6) Official Payments Corporation." The following table summarizes the impact of the Company's investment in OPAY by income statement category: Page 26 of 38 OPAY
==================================================================================================================== Three months ended Nine months ended September 30, September 30, (Dollars in thousands, except per share amounts) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------- Net interest income $ 1,492 $ (96) $ 3,248 $ (110) Noninterest income 743 495 4,308 1,712 Salary and benefits 5,164 717 19,151 1,470 Other noninterest expense 2,688 422 12,064 765 Gain from exercise of OPAY stock options - - 922 - -------------------------------------------------------------------------------------------------------------------- Net (loss) income before minority interest (5,617) (739) (22,737) (633) Minority interest in loss (income) 2,464 148 10,348 127 -------------------------------------------------------------------------------------------------------------------- Net (loss) income before taxes (3,153) (591) (12,389) (506) Income tax (benefit) expense (1,113) (247) (4,375) (209) -------------------------------------------------------------------------------------------------------------------- Net (loss) income $ (2,040) $ (344) $ (8,014) $ (297) ==================================================================================================================== Impact on diluted earnings per share $ (0.05) $ (0.01) $ (0.18) $ (0.01) ====================================================================================================================
Salaries and benefits expense reported for the nine months ended September 30, 2000, include a $4 million one-time charge, before minority interest, related to the recent departure of OPAY's chief financial officer. OPAY is expected to report operating losses for the remainder of the year. BALANCE SHEET ANALYSIS Investment Securities The following tables provide comparative period-end balances of securities held to maturity and securities available for sale for the periods indicated:
================================================================================================================== Securities Held to Maturity Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------ September 30, 2000 Industrial development bonds $ 3,620 $ - $ - $ 3,620 ------------------------------------------------------------------------------------------------------------------ Total $ 3,620 $ - $ - $ 3,620 ================================================================================================================== December 31, 1999 Industrial development bonds $ 3,744 $ - $ - $ 3,744 ------------------------------------------------------------------------------------------------------------------ Total $ 3,744 $ - $ - $ 3,744 ==================================================================================================================
Page 27 of 38
======================================================================================================================= Securities Available for Sale Gross Gross Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ----------------------------------------------------------------------------------------------------------------------- September 30, 2000 U.S. Treasury and federal agencies $ 935,037 $ - $ (4,514) $ 930,523 Commercial Paper 69,018 69,018 Mutual funds 29,027 - - 29,027 Other securities 36,904 4,857 - 41,761 ----------------------------------------------------------------------------------------------------------------------- Total $ 1,069,986 $ 4,857 $ (4,514) $ 1,070,329 ======================================================================================================================= December 31, 1999 U.S. Treasury and federal agencies $ 678,462 $ - $ (4,322) $ 674,140 Commercial Paper 228,670 - - 228,670 Mutual funds 92,184 - - 92,184 Other securities 23,718 21,573 - 45,291 ----------------------------------------------------------------------------------------------------------------------- Total $ 1,023,034 $ 21,573 $ (4,322) $ 1,040,285 =======================================================================================================================
Gross gains totaling $14.4 million and gross losses totaling $731,000 respectively, were realized on sales of securities available for sale during the nine months ended September 30, 2000. Loans Held for Sale Loans held for sale at September 30, 2000, totaling $79.8 million, include the remaining $17.2 million balance of Lewis Horwitz Organization ("LHO") loans held for sale and $62.6 million of SBA loans held for sale. The LHO loans were reclassified to the held for sale category in October 1999, following finalization of an agreement to sell the loans to ICII at a fixed price (effectively the book value less the allocated allowance less the interest spread over the sale period as defined in the agreement), over a 15-month period. Loans made to ICII by Imperial Bank to facilitate their purchase of LHO loans totaling $7.8 million were paid off in September 2000 with proceeds of a new $10 million loan made to ICII. The new loan to ICII is secured by a commercial real estate property and has a maturity of less than one year. Management expects the remaining loans to be either paid off by the borrower in the normal course of business or purchased by ICII on or before December 29, 2000. Loans The following table provides a summary of loans by category for the periods indicated:
======================================================================================================================= (Dollars in thousands) September 30, 2000 December 31, 1999 September 30, 1999 Balance Percent Balance Percent Balance Percent ----------------------------------------------------------------------------------------------------------------------- Commercial $ 3,424,854 82.69% $ 3,016,695 83.52% $ 3,091,962 84.75% Loan secured by real estate: Real estate term loans 101,200 2.44 100,012 2.77 109,367 3.00 Residential tract construction loans 573,594 13.85 457,337 12.66 411,473 11.28 Consumer loans 42,200 1.02 38,104 1.05 35,435 0.97 ----------------------------------------------------------------------------------------------------------------------- Gross loans 4,141,848 100.00% 3,612,148 100.00% 3,648,237 100.00% Less allowance for loan losses (90,088) (71,677) (68,769) ----------------------------------------------------------------------------------------------------------------------- Total loans $ 4,051,760 $ 3,540,471 $ 3,579,468 =======================================================================================================================
Total loans grew to $4.1 billion at September 30, 2000, an increase of approximately 14% from $3.6 billion at December 31, 1999, and an increase of 13% from September 30, 1999. Page 28 of 38 CREDIT QUALITY AND ALLOWANCE FOR LOAN LOSSES Nonaccrual Loans, Restructured Loans and Real Estate and Other Assets Owned Nonaccrual loans, which include loans 90 days or more past due, totaled $59.9 million, or 1.45% of total loans, at September 30, 2000, compared with $27.6 million, or 0.76% of total loans, at December 31, 1999, and $43.0 million, or 1.18% of total loans, at September 30, 1999. The increase in nonaccrual loans compared with year-end and a year ago is largely due to a limited number of loans in the Syndicated Finance Segment. See - "Operating Segment Results." The remaining nonaccrual loans at quarter end consisted of commercial loans individually no larger than $3.5 million. The following table provides information on nonaccrual loans, restructured loans and real estate and other assets owned for the periods indicated:
================================================================================================================= Sept. 30 June 30, March 31, Dec. 31, Sept. 30, (Dollars in thousands) 2000 2000 2000 1999 1999 ----------------------------------------------------------------------------------------------------------------- Nonaccrual loans: Commercial $ 59,263 $ 55,683 $ 35,408 $ 27,020 $ 42,539 Real estate 480 461 480 569 496 Consumer 125 - - - - ----------------------------------------------------------------------------------------------------------------- Total nonaccrual loans 59,868 56,144 35,888 27,589 43,035 ================================================================================================================= Restructured loans 6,284 6,401 6,914 4,081 4,640 ================================================================================================================= Real estate and other assets owned: Real estate and other assets owned, gross 826 826 935 935 1,237 ----------------------------------------------------------------------------------------------------------------- Real estate and other assets owned, net 826 826 935 935 1,237 ----------------------------------------------------------------------------------------------------------------- Total $ 66,978 $ 63,371 $ 43,737 $ 32,605 $ 48,912 =================================================================================================================
The $32.3 million net increase in nonaccrual loans at September 30, 2000, compared with December 1999 reflects new loans totaling $127.0 million placed on nonaccrual status offset by $39.0 million in charge-offs, $40.7 million in payments (includes $10.7 million in insurance settlement proceeds) on nonaccrual loans and $15.0 million of nonaccrual loans returning to accrual status. The Company's focus on business customers generates a relatively large average loan size that contributes to the variability of its nonaccrual asset totals. Restructured loans, loans that have had their original terms modified, totaled $6.3 million, $4.1 million and $4.6 million at September 30, 2000, December 31, 1999, and September 30, 1999, respectively. All restructured loans were performing in accordance with their modified terms as of September 30, 2000. Real estate and other assets owned ("OREO") include properties acquired through foreclosure or through full or partial satisfaction of loans. The difference between the fair value of the collateral, less the estimated costs of disposal, and the loan balance at the time of transfer to OREO is reflected in the allowance for loan losses as a charge-off. Any subsequent declines in the fair value of the property after the date of transfer are recorded through a provision for write-downs on OREO. OREO totaled $826,000, $935,000 and $1.2 million at September 30, 2000, December 31, 1999 and September 30, 1999, respectively. There were no valuation allowances on OREO for these reporting dates. All loans on nonaccrual status are considered to be impaired; however, not all impaired loans are on nonaccrual status. Impaired loans on accrual status must meet the criteria of all payments being current and the loan underwriting must support the debt service requirements. Factors that contribute to a performing loan being classified as impaired include substantial doubt about the ability of the borrower to make all principal and interest payments under the original terms of the loan, a below market interest rate, delinquent taxes and debts to other lenders that cannot be serviced from existing cash flow. Page 29 of 38 The following table contains information for loans classified as impaired:
========================================================================================================================= Net Carring Specific Net (Dollars in thousands) Value Allowance Balance ------------------------------------------------------------------------------------------------------------------------- September 30, 2000 Loans with specific allowances $ 62,169 $ (28,693) $ 33,476 Loans without specific allowances 13,107 - 13,107 ------------------------------------------------------------------------------------------------------------------------- Total $ 75,276 $ (28,693) $ 46,583 ========================================================================================================================= December 31, 1999 Loans with specific allowances $ 28,779 $ (10,160) $ 18,619 Loans without specific allowances 11,978 - 11,978 ------------------------------------------------------------------------------------------------------------------------- Total $ 40,757 $ (10,160) $ 30,597 =========================================================================================================================
Impaired loans were classified as follows:
========================================================================================================================= September 30, December 31, (Dollars in thousands) 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Current $ 15,408 $ 12,920 Past due - 248 Nonaccrual 59,868 27,589 ------------------------------------------------------------------------------------------------------------------------- Total $ 75,276 $ 40,757 =========================================================================================================================
Loans classified as impaired totaled $75.3 million at September 30, 2000, compared with $40.8 million at December 31, 1999. The $34.5 million net increase in impaired loans at September 30, 2000, compared with December 1999 reflects loans totaling $136.3 million newly classified as impaired offset by $39.0 million in charge-offs, $42.2 million in payments on impaired loans and $20.6 million of loans removed from impaired status. The Company's average recorded investment in impaired loans for the first nine months of 2000 was $57.2 million. Interest income collected on impaired loans totaled approximately $858,000 for the first nine months of 2000, compared with $1.7 million for the year-earlier period. Allowance and Provision for Loan Losses The allowance for loan losses is maintained at a level considered appropriate by management to be adequate to absorb estimated known and inherent risks in the existing portfolio. The Company's Credit Review Department performs an ongoing assessment of the risks inherent in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses which is charged against current period operating results, and is decreased by the amount of net charge-offs during the period. The Company utilizes a migration model, a technique that estimates the inherent loss in the portfolio by applying loss factors to grades of loans, to determine the level of the allowance and provision for loan losses. The migration model utilizes an average loss rate over a rolling twelve quarter base period and incorporates a standard deviation analysis to provide probabilities for loss experience. The loss factors used in the model are updated quarterly. The primary qualitative factors considered in the assessment of loss factors are: changes in local economic and business conditions, including the condition of specific market segments; changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices; the existence and effect of any concentrations within the portfolio and changes in the level of such concentrations; changes in the trend of delinquencies and in the volume and nature of adversely graded nonaccrual and impaired loans; and external factors such as competition and legal and regulatory requirements that could potentially impact the level of credit losses in the portfolio. Management believes that the allowance for loan losses at September 30, 2000 is adequate. Future additions to the allowance will be subject to continuing evaluation of inherent risk in the loan portfolio. At September 30, 2000, the allowance for loan losses was $90.1 million, or 2.18% of total loans, compared with $71.7 million, or 1.98% of total loans at December 31, 1999, and $68.8 million, or 1.88% of total loans, at September 30, 1999. Page 30 of 38 The allowance for loan losses represented 150% of nonaccrual loans at September 30, 2000, compared with 260% of nonaccrual loans at December 31, 1999, and 160% of nonaccrual loans at September 30, 1999. The following table summarizes activity in the allowance for loan losses:
======================================================================================================================= Nine months ended September 30, (Dollars in thousands) 2000 1999 ----------------------------------------------------------------------------------------------------------------------- Balance, beginning of period $ 71,677 $ 62,649 ======================================================================================================================= Loans charged off: Commercial (44,921) (12,420) Real estate - (295) Consumer (236) (69) ----------------------------------------------------------------------------------------------------------------------- Total charge-offs (45,157) (12,784) ----------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 9,747 2,011 Real estate 21 67 Consumer 6 6 ----------------------------------------------------------------------------------------------------------------------- Total recoveries 9,774 2,084 ----------------------------------------------------------------------------------------------------------------------- Net loans charged off (35,383) (10,700) Provision for loan losses 53,794 20,820 Portfolio transfer - (4,000) ----------------------------------------------------------------------------------------------------------------------- Balance, end of period $ 90,088 $ 68,769 ======================================================================================================================= Loans outstanding, end of period 4,141,848 3,648,237 ----------------------------------------------------------------------------------------------------------------------- Average loans outstanding 4,222,856 3,914,946 ======================================================================================================================= Ratio of net charge-offs to average loans (annualized) 1.12% 0.37% Ratio of allowance for loan losses to loans outstanding at Sept 30 2.18 1.88 Ratio of allowance for loan losses to nonaccrual loans at Sept 30 150.48 159.80 Ratio of provision for loan losses to net charge-offs 152.03 194.58 =======================================================================================================================
Asset Quality by Type of Operation The Company's exposure to credit quality varies by type of operation. Management considers the exposure to credit risk, potential returns and allocated financial capital in operating the Company. Management believes that it is not appropriate to use the aggregate credit quality statistics to understand the credit exposure of the Company's operations. The Company devotes capital to its principal subsidiary, Imperial Bank, to two operating subsidiaries of Bancorp and the Bank, Imperial Credit Corporation ("ICC") and Imperial Ventures, Inc., ("IVI"), respectively, as well as to the Company itself. The activities of ICC and IVI include loans to and investments in emerging companies. The underwriting standards for these activities differ from those used by the Bank and the expected returns and possible credit losses are each higher than what would be expected from application of the Bank's loan underwriting criteria. Based upon these circumstances, the Company limits the amount of capital allocated to the type of lending and investing undertaken by ICC and IVI. A portion of the Bank's nonaccrual loans are covered by government guarantees and, accordingly, management excludes such loans from its assessment of Bank credit quality. In addition, as discussed above in "Operating Segment Results," the Syndicated Loan Segment has specialized underwriting. As contrasted with the segment disclosure, the following supplemental analysis reflects material nationally syndicated credits managed in regional offices (primarily because of deposit relationships) in the syndicated loan results. Management's supplemental analysis of credit quality by business activity is provided in the tables below: Page 31 of 38
========================================================================================================================== For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated September 30, 2000 Loans (2) (3) Operations Total Bank ICC Total (Dollars in thousands) -------------------------------------------------------------------------------------------------------------------------- Average loans and equity invest (1) $ 522,743 $ 97,616 $ 3,514,841 $ 4,135,200 $39,185 $ 4,174,385 Average nonaccrual loans 14,305 2,354 33,186 49,845 425 50,270 Nonaccrual loans at September 30 31,209 2,458 26,201 59,868 - 59,868 Average allocated capital 69,276 3,972 378,620 451,868 47,071 498,939 Net charge-offs 23,923 58 10,240 34,221 1,162 35,383 YTD warrant and equity - investment income - - 22,831 22,831 19,433 42,264 Avg nonaccrual loans/avg loans 2.66% 2.35% 0.94% 1.19% 1.07% 1.19% Net charge-offs as a percentage of total average loans (annualized) 5.95 0.08 0.39 1.09 7.37 1.12 --------------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include an $8.8 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was charged-off in May 2000. (3) Approximately 75% of SBA balances are guaranteed by the U.S Government ================================================================================
=========================================================================================================================== For the nine months ended Syndicated SBA Loans All Other Bank IVI and Consolidated September 30, 1999 Loans (2) (3) Operations Total Bank ICC Total (Dollars in thousands) --------------------------------------------------------------------------------------------------------------------------- Average loans and equity invest (1) $ 600,359 $ 34,080 $ 3,194,241 $ 3,828,680 $16,109 $ 3,844,789 Average nonaccrual loans 100 636 42,525 43,261 - 43,261 Nonaccrual loans at September 30 3,401 2,150 37,484 43,035 - 43,035 Average allocated capital 74,963 4,015 300,113 379,091 21,332 400,423 Net charge-offs (recoveries) 6,328 - 4,372 10,700 - 10,700 YTD warrant and equity - investment income - - 9,555 9,555 2,093 11,648 Avg nonaccrual loans/avg loans 0.02% 1.83% 1.31% 1.12% 0.00% 1.11% Net charge-offs as a percentage of total average loans (annualized) 1.41 - 0.18 0.37 - 0.37 ---------------------------------------------------------------------------------------------------------------------------
(1) Includes average loans and loans held for sale excluding nonaccrual loans, and equity investments. (2) Average nonaccrual loans and net charge-offs include a $4.5 million syndicated loan managed in a commercial banking office due to a deposit relationship. This loan was fully charged-off by June 30, 1999. (3) Approximately 75% of SBA balances are guaranteed by the U.S Government. ================================================================================ Management's observations from the above analyses are that (1) the current year's annualized charge-off rate for the All Other Bank Operations (representing approximately 84% of consolidated loans) is only 39 basis points, approximately one-third the aggregate rate of 112 basis points, (2) the highest charge-off rate is in the IVI/ICC subsidiaries and is acceptable to management because the warrant and investment gains of approximately $19 million substantially exceed the credit risk from this type of investing activity (approximately $1.2 million in charge-offs), (3) the increase in the annualized net charge-off rate for syndicated loans is reflective of the matters discussed above, and (4) the 1999 net-charge-off rate for the All Other Bank Operations was at an extremely low level (18 basis points) and the current year's rate (approximately 62 basis points without the $6.0 million commercial loan recovery) is more indicative of the bank's historical results. Page 32 of 38 CAPITAL RESOURCES At September 30, 2000, shareholders' equity increased to $505.0 million from $473.4 million at December 31, 1999, and $414.5 million at September 30, 1999. During the nine months ended September 30, 2000, shareholders' equity was reduced by $30.5 million, due to common stock repurchases under the Company's Stock Repurchase Program. The Company repurchased and retired 1.7 million shares of its common stock during the first nine months of 2000. At September 30, 2000, 579,324 shares remain available for repurchase under the Company's Stock Repurchase Program. The Company subsequently terminated its Stock Repurchase Program due to the anticipated acquisition by Comercia Inc. Management is committed to maintaining capital at a level sufficient to assure shareholders, customers and regulators that the Company and its bank subsidiaries are financially sound. The Company and its bank subsidiaries are subject to risk-based capital regulations promulgated by the federal banking regulators. These guidelines are used to evaluate capital adequacy and are based on an institution's asset risk profile and off-balance sheet exposures. The risk-based capital guidelines assign risk weightings to assets both on- and off-balance sheet and place increased emphasis on common equity. Federal law requires each federal banking agency to take prompt corrective action to resolve problems of insured depository institutions including, but not limited to, those that fall below one or more prescribed capital ratios. According to the regulations, institutions whose Tier I and total capital ratios meet or exceed 6 percent and 10 percent, respectively, are deemed to be "well capitalized". Tier I capital basically consists of common shareholders' equity and noncumulative perpetual preferred stock and minority interest of consolidated subsidiaries minus intangible assets. Based on the guidelines, the Company's Tier I and total capital ratios at September 30, 2000, were 10.14% and 13.09% respectively, compared with 12.76% and 9.54%, respectively, at September 30, 1999.
Capital Ratios for Imperial Bancorp and Imperial Bank/(1)/ =============================================================================================================================== September 30, 2000 ------------------------------------------------------------------------------------------------------------------------------- To Be Well Capitalized For Capital Adequacy Under Prompt Corrective (Dollars in thousands) Actual Purposes Action Provisions ------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk-weighted assets): Company $ 768,765 13.09% $ 469,973 8.00% $ 587,467 10.00% Bank 703,000 12.14 463,338 8.00 579,172 10.00 Tier I Capital (to risk-weighted assets): Company 595,668 10.14 234,987 4.00 352,480 6.00 Bank 530,942 9.17 231,669 4.00 347,503 6.00 Leverage (to average assets): Company 595,668 9.02 198,222 3.00 330,370 5.00 Bank 530,942 8.13 196,005 3.00 326,674 5.00 ===============================================================================================================================
(1) Includes common shareholders' equity (excluding unrealized gains on securities available for sale) less goodwill and other disallowed intangibles. Risk-weighted assets for the Company and Imperial Bank were $5,553.6 million and $5,479.8 million, respectively, at September 30, 2000. Risk-weighted assets for the Company and the Bank were $5,063.0 million and $4,996.5 million at September 30, 1999, respectively. In April 1999, Imperial Bank issued $100 million of 8.5% 10-year Subordinated Capital Notes. The notes qualify as Tier 2 capital under regulatory guidelines. In May 2000, the Company redeemed $10.0 million of its Capital Securities. These securities qualify as Tier 1 capital under regulatory guidelines. Page 33 of 38 In addition to the risk-weighted ratios, all banks are required to maintain leverage ratios, to be determined on an individual basis, but not below a minimum of 3 percent. The ratio is defined as Tier I capital to average total assets for the most recent quarter. The Company's leverage ratio was 9.02% at September 30, 2000, compared with 8.50% at September 30, 1999, well in excess of minimum regulatory requirements. LIQUIDITY Liquidity management relates to the Company's ability to meet its cash requirements and is managed through its asset/ liability management process. The Company monitors its cash inflows and outflows associated with its lending and deposit activities and modifies its asset and liability positions as liquidity requirements change. The Company also relies on projections of loan and deposit growth in managing its liquidity position. The Company's primary source of liquidity is its deposit base. This source has historically provided a significant majority of the Company's liquidity needs. Total deposits grew to $6.5 billion at September 30, 2000, from $5.9 billion at December 31, 1999, and $5.7 billion at September 30, 1999. Demand deposits increased to $3.5 billion, or 54% of total deposits, at September 30, 2000, from $2.5 billion, or 43% of total deposits at December 31, 1999, and $2.9 billion, or 51% of total deposits, at September 30, 1999. See - "Operating Segment Results." The Company also uses other methods of meeting its liquidity requirements including short-term borrowings in the form of federal funds purchased, repurchase agreements, commercial paper, Treasury tax and loan notes ("TT & L") and occasionally the sale of securities held in its available for sale portfolio. Short-term borrowings decreased to $53.0 million at September 30, 2000, from $156.7 million at December 31, 1999, and $101.6 million at September 30, 1999. The large decrease in short-term borrowings compared with the earlier periods is due to a reduction in TT & L balances. Management made the decision to reduce the level of TT & L borrowings in order to use the collateral in connection with the formation of ISII. The Company has recently been in a position of having excess liquidity due primarily to strong demand deposit growth that surpassed loan funding requirements. The Company has a policy of maintaining net liquid assets to total deposits (the liquidity ratio) of at least 20%. The liquidity ratio averaged 26.5% for the first nine months of 2000. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ASSET/LIABILITY MANAGEMENT Interest Rate Sensitivity Management The primary objective of the asset liability management process is to manage the Company's exposure to interest rate fluctuations while maintaining adequate levels of liquidity and capital. In order to manage its interest rate sensitivity, the Company has adopted policies that attempt to protect pretax net interest income assuming various interest rate scenarios. This is accomplished by adjusting the repricing characteristics of the Company's assets and liabilities as interest rates Page 34 of 38 change. The Company's Asset Liability Committee ("ALCO") chooses strategies in conformance with its policies to achieve an appropriate trade off between interest rate sensitivity and the volatility of pretax net interest income and net interest margin. Each month, the Company assesses its overall exposure to potential changes in interest rates and the impact such changes may have on net interest income and the net interest margin by simulating various interest rate scenarios over future time periods. Through the use of these simulations, the Company can approximate the impact these projected rate changes may have on its entire on- and off-balance sheet positions, on any particular segment of the balance sheet, and on overall profitability. The majority of the Company's loan portfolio is variable rate, therefore, net interest income will increase during a period of rising interest rates and decrease during a period of declining interest rates. The Company's net interest margin is sensitive to changes in interest rates. In addition, the Company's interest-earning assets, primarily its loans, are generally tied to the prime rate, an index which tends to react more slowly to changes in market rates than other money market indices such as LIBOR. The rates paid for the Company's interest-bearing liabilities, however, do correlate with LIBOR. This mismatch creates a spread relationship risk between the Company's prime based assets and LIBOR correlated liabilities. The Company has developed strategies to protect both net interest income and net interest margin from significant movements in interest rates. These strategies involve purchasing interest rate floors, caps and swaps. RISK FACTORS AFFECTING FUTURE RESULTS This report contains statements that may be considered forward-looking. Actual results could differ materially from the results indicated by these statements because of many factors that are beyond our ability to control or predict. The following is a list of primary risks facing the Company: Interest Rate Risk: The Company's profitability is primarily dependent on the net interest spread between its earning assets and the related funding sources. A large portion of its earning asset base relates to the prime interest rate. Future reductions in the prime interest rate could have material and adverse effects on the Company's profitability. A large portion of its funding sources are non-interest bearing and face the possibility of disintermediation either to a competing bank - creating a loss of market share and/or a need for replacement - or disintermediation into an interest-bearing account - causing a significant reduction to net interest income. The Company employs financial derivatives to hedge interest rate risk, specifically a $2 billion floor in effect each quarter through September 2001. If the cost of the hedges increases, the Company would either have to pay the increased cost to maintain the hedge or find alternative methods to mitigate interest rate risk. Credit Risk: The Company generally faces risk from its borrower base in that they may fail to perform in accordance with the terms of their loans, especially the full repayment of loan principal. The Company has adopted underwriting standards in an effort to minimize these risks. The Company's profitability could be both materially and adversely effected should it experience increased loan defaults and charge-offs. Regulatory Risk: As a part of the banking industry, the Company is subject to extensive regulatory control and attention. Legislation such as the repeal of the Glass-Steagal Act in the recently adopted Gramm-Leach-Bliley Act have moved the banking industry and financial intermediaries to the forefront in terms of regulatory attention and concern. Limitations concerning client activity, liquidity requirements, capital requirements, transactions with affiliates, business focus, tax consequences, interstate banking and treatment of subsidiaries could have material and adverse impact on profitability. Local and National Economic Risk: The Company has broadened its lending focus with expansion into Austin, Boston, Dallas, Denver, Kirkland, New York, Phoenix, Raleigh-Durham and Reston. However, the vast majority of clients and business still come from California. Therefore, the Company faces some concentrated risks concerning future economic status for California along with the nation as a whole. A significant reduction in demand for the Company's products and increased credit losses could result from an economic slowdown either locally or nationally. Subsidiary Risk: The Company is a 56% owner of Official Payments Corporation ("OPAY"), a leading provider of electronic payment options to government entities. OPAY is in the early stages of operations and expects to incur losses Page 35 of 38 from operations in the future, of which the Company will record its proportionate interest. Currently, OPAY generates most of its revenues from processing income tax payments. Tax payments are seasonal in nature and produce inconsistent earnings streams. These inconsistent earnings will be reflected in the Company's financial statements and press releases. OPAY is extremely dependent on maintaining its relationship with the IRS to maintain future revenues. Loss of IRS processing would severely limit OPAY's ability to earn consistent future revenues and establish market share and name recognition. Warrants and Equity Investments Income Risk: In the past, the Company has been able to generate substantial income derived from the sale of stock, obtained by the Company through the exercise of warrants received from certain clients as provided in the loan terms. The Company has also realized income from equity investments in emerging growth companies and investments in venture capital funds. Many factors may influence the ability to collect future income from these sources such as equity market fluctuations, market acceptance for IPOs, the client's ability to establish and maintain a successful company and the unexercised expiration of the warrant agreements. The nature and timing of these factors could create situations that would greatly reduce warrant and equity investment income. Competitive Risk: The Company faces constant competition for loans, deposits and fee-based income from other national, regional and community commercial banks as well as other financial intermediaries such as, savings and loans, finance companies, brokerage firms, insurance companies and credit unions. A loss of market share in its deposit base would force the Company to turn to higher priced funding sources to support its balance sheet. These higher priced funding sources would significantly reduce net interest income. On the asset side, the Company also faces intense competition for its loan products. Legal Liability Risk: Claims and lawsuits against the Company arise throughout the normal course of operations. Currently, the Company believes that the liability, if any, relating to these actions will not have a material impact on the Company. However, future claims could have material and adverse impacts on profitability. Merger Risk: Imperial Bancorp has entered into an agreement to be acquired by Comerica, Inc. In connection with the agreement, certain risks and uncertainties include but are not limited to: . conditions precedent to the close of the merger agreement may not be satisfied; . the timing and completion of the merger and new operations may be delayed or prohibited; . the benefits anticipated to result from the merger may not be realized; and . uncertainty relating to the merger may cause the combined company to lose current or fail to gain new customer and employees. NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 133 - Accounting for Derivative Instruments and Hedging Activities In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. It specifies necessary conditions to be met to designate a derivative as a hedge. On September 15, 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB No. 133." SFAS No. 138 addresses a limited number of issues causing implementation difficulties for numerous entities that are required to apply SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB statement No. 133, and Statement 138," continues to be effective for all fiscal quarters of all fiscal years beginning after June 30, 2000. Although management does not believe that adoption of SFAS No. 133 will have a material impact on its results of operations and financial position, management anticipates that the new pronouncement will have an impact on accounting for warrants received in lending transactions. Specifically, equity warrants will be accounted for as embedded derivatives and, accordingly, such warrants will in general be recognized as an asset at fair value at the time the related lock-up period expires. Page 36 of 38 SFAS No. 140 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities In September 2000, the FASB issued SFAS No 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" as a replacement of SFAS 125 effective for disclosures in financial statements issued subsequent to December 15, 2000, and for transactions entered after March 31, 2001. Management does not expect adoption of SFAS 140 will have a material impact on the financial statements. PART II OTHER INFORMATION ITEM 1. Legal Proceedings Due to the nature of the businesses, the Company and its subsidiaries are subject to numerous legal actions, threatened or filed, arising in the normal course of business. Certain of the actions currently pending seek punitive damages, in addition to other relief. The Company is of the opinion that the eventual outcome of all currently pending legal proceedings will not be materially adverse to the Company. ITEM 2. Changes in Securities and Use of Proceeds None ITEM 3. Defaults upon Senior Securities None ITEM 4. Submission of Matters to a Vote of Security Holders None ITEM 5. Other Information None ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits Index Exhibit Number Description 10.1 Special Compensation Agreement dated May 19, 2000, between Company, Imperial Bank and George L. Graziadio, Jr.* 10.2 Special Compensation Agreement dated May 19, 2000, between Company, Imperial Bank and Norman P. Creighton* 27.1 Financial Data Schedule* All other material referenced in this report which is required to be filed as an exhibit hereto has previously been submitted. (b) Form 8-K filed on November 02, 2000. * Previously filed on November 14, 2000 Page 37 of 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. IMPERIAL BANCORP Dated: November 22, 2000 By: /s/ Dennis J. Lacey --------------------------------- Dennis J. Lacey Executive Vice President and Chief Financial Officer By: /s/ Paul E. Adkins --------------------------------- Paul E. Adkins Senior Vice President and Controller Page 38 of 38